QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

COMMISSION FILE NUMBER: 000-20970

VISION-SCIENCES, INC.

(Exact name of registrant as specified in its charter)

Delaware

13-3430173

(State of incorporation)

(I.R.S. Employer

Identification Number)

40 Ramland Road South, Orangeburg, NY

10962

(Address of principal executive offices)

(Zip Code)

(845) 365-0600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes x No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller

reporting company)

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 1, 2012:

Common Stock, par value of $0.01 per share

46,217,441

(Title of Class)

(Number of Shares)

VISION-SCIENCES, INC.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Part I.

Financial Information

Item 1.

Financial Statements

Condensed Consolidated Statements of Operations

4

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statement of Stockholders’ Deficit

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

24

Item 4.

Controls and Procedures

24

Part II.

Other Information

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

26

Item 4.

Submission of Matters to Vote of Security Holders

26

Item 5.

Other Information

26

Item 6.

Exhibits

26

Signatures

27

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Examples of forward-looking statements include statements about expectations about future financial results, future products and future sales of new and existing products, future expenditures, and capital resources to meet anticipated requirements. Generally, words such as “expect,” “believe,” “anticipate,” “may,” “will,” “plan,” “intend,” “estimate,” “could,” and other similar expressions are intended to identify forward-looking statements. The forward-looking statements are based on our future plans, strategies, projections and predictions and involve risks and uncertainties, and our actual results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference could include, among others, the availability of capital resources; the availability and adequacy of third-party reimbursement; government regulation; the availability of raw material components; our dependence on certain distributors and customers; our ability to effect expected sales; competition; technological difficulties; product recalls; general economic conditions and other risks detailed in this Quarterly Report on Form 10-Q and any subsequent periodic filings we make with the Securities and Exchange Commission (“SEC”). While we believe the assumptions underlying such forward-looking statements are reasonable, there can be no assurance that future events or developments will not cause such statements to be inaccurate. All forward-looking statements contained in this report are qualified in their entirety by this cautionary note.

We do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances, except as may be required by law.

3

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Vision-Sciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

September 30,

Six Months Ended

September 30,

2012

2011

2012

2011

Net sales

$

3,739

$

4,025

$

7,135

$

7,781

Cost of sales

2,669

2,628

5,152

5,256

Gross profit

1,070

1,397

1,983

2,525

Selling, general, and administrative expenses

3,164

3,463

5,894

6,389

Research and development expenses

527

739

1,014

1,431

Operating loss

(2,621

)

(2,805

)

(4,925

)

(5,295

)

Interest income

1

2

2

7

Interest expense

(237

)

(99

)

(431

)

(198

)

Debt cost expense

(128

)

(43

)

(272

)

(84

)

Loss on extinguishment of debt

(1,244

)

-

(1,244

)

-

Other, net

(35

)

(10

)

(40

)

(11

)

Loss before provision for income taxes

(4,264

)

(2,955

)

(6,910

)

(5,581

)

Income tax provision

-

(2

)

1

2

Net loss

$

(4,264

)

$

(2,953

)

$

(6,911

)

$

(5,583

)

Net loss per common share - basic and diluted

$

(0.09

)

$

(0.07

)

$

(0.15

)

$

(0.13

)

Weighted average shares used in computing net loss per common share - basic and diluted

(Unaudited, in thousands except number of shares and per share amounts)

Note 1. Summary of Significant Accounting Policies

Vision-Sciences, Inc. and its subsidiaries (the “Company,” or “our”, “us” or “we”) designs, develops, manufactures, and markets products for endoscopy – the science of using an instrument, known as an endoscope, to provide minimally invasive access to areas not readily visible to the human eye. Our products are sold throughout the world through direct sales representatives in the United States (“U.S.”) and independent distributors for the rest of the world. With respect to our urology products, we are the exclusive supplier to the Endoscopy Division of Stryker Corporation (“Stryker”). Our largest geographic markets are the U.S. and Europe.

We are incorporated in Delaware, and are the successor to operations begun in 1987. In December 1990, Machida Incorporated (“Machida”) became our wholly-owned subsidiary. We own the registered trademarks Vision Sciences®, Slide-On®, EndoSheath®, EndoWipe® and The Vision System®. Not all products referenced in this report are approved or cleared for sale, distribution, or use.

Basis of Presentation and Preparation

We have prepared the condensed consolidated financial statements included herein according to generally accepted accounting principles in the United States of America (“U.S. GAAP”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include, in the opinion of management, all adjustments that we consider necessary for a fair presentation of such information. We have condensed or omitted certain information and footnote disclosures normally included in financial statements pursuant to those rules and regulations. We believe, however, that our disclosures are adequate to make the information presented not misleading.

The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. Please read these condensed consolidated financial statements in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.

Liquidity and Capital Resources

We have incurred substantial operating losses since our inception and there can be no assurance that we will ever achieve or sustain a profitable level of operations in the future. We anticipate negative cash flows from operations during the remainder of fiscal 2013, driven by continued investment in a direct sales force for the U.S. market, spending for marketing, and general business operations. As of September 30, 2012, we had cash and cash equivalents totaling approximately $3.1 million. We expect that our cash at September 30, 2012, together with the $5 million of capital available under a convertible note dated September 19, 2012 with Lewis C. Pell, our Chairman (see Note 5. Long-Term Debt – Related Party for additional information), should be sufficient to fund our operations through at least September 30, 2013. However, if our performance expectations fall short (including our failure to generate expected levels of sales) or our expenses exceed expectations, we will need to secure additional financing and/or reduce our expenses to continue our operations. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurance that any contemplated additional financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.

Summary of Significant Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable, based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are any differences (other than nominal differences) between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments, and assumptions and that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

• Revenue recognition;

• Stock-based compensation expense;

• Allowances for doubtful accounts;

• Inventory obsolescence and realization;

• Obligations under warranties; and

• Other contingencies.

The accompanying condensed consolidated financial statements reflect the accounts of the Company. All significant inter-company accounts and transactions have been eliminated in consolidation.

In determining the fair value of the convertible debt, we compared the coupon rate of 0.84%, the conversion premium of 0%, and the percentage of market cap the face value of the debt instrument was prior to the announcement of the debt on September 19, 2012 (34.5%) to public company convertible debt issuances over the past sixteen (16) months in the healthcare industry. We determined the fair value of the convertible debt to be equal to its face (carrying) value.

Note 2. Basic and Diluted Net Loss per Common Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding. For all periods presented, the diluted net loss per common share is the same as basic net loss per common share, as the inclusion of other shares of stock issuable pursuant to stock options, warrants, and convertible debt would be anti-dilutive. The following table summarizes equity securities that were excluded from the calculation of fully diluted loss per share as of September 30, 2012 and 2011.

September 30,

2012

2011

Convertible debt

12,500,000

-

Stock options

6,291,179

7,549,017

Warrants

1,880,620

1,880,620

Restricted stock

177,150

426,089

Total anti-dilutive securities

20,848,949

9,855,726

Note 3. Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (“FIFO”) method and consist of the following:

September 30,

2012

March 31,

2012

Raw materials

$

3,563

$

3,271

Work in process

291

432

Finished goods

777

267

Inventories, net

$

4,631

$

3,970

Raw materials include components purchased from independent suppliers. Most purchased components are available from multiple sources, with the exception of certain key components which are supplied to us by key suppliers, with whom we have long-term supply arrangements, but no long-term supply agreements.

Note 4. Advances from Customers

We currently have a three-year agreement with Stryker under which we are the exclusive supplier of Stryker-branded flexible video and fiber cystoscopes. These cystoscopes employ our patented EndoSheath technology, which are co-branded Stryker and Vision-Sciences. We also supply Stryker with flexible ureteroscopes. Stryker has the exclusive rights to distribute products we manufacture, including cystoscopes, urology EndoSheath technology, and ureteroscopes, in North America, South America, Latin America, China, and Japan. Although Stryker was to receive the exclusive rights for the rest of the world in April 2012, we reached an agreement with Stryker to delay this launch until at least December 2012. The agreement expires in April 2014 unless otherwise renewed.

We also have a development and supply agreement with SpineView, Inc. (“SpineView”) under which we developed and supply a charge-coupled device (CCD) based video surgical endoscope for use with SpineView’s products.

9

We received advances from Stryker for future orders of our scopes and EndoSheath technology and from SpineView for the initial stocking order of 50 SpineView surgical endoscope systems. The following table summarizes the activity related to these and other customer advances related to service contracts for the three and six months ended September 30, 2012 and 2011:

Three months ended September 30, 2012

Stryker

SpineView

Other

Total

Beginning balance at July 1

$

-

$

161

$

-

$

161

Additional advances received

-

-

-

-

Revenue recognized

-

(161

)

-

(161

)

Ending balance at September 30

$

-

$

-

$

-

$

-

Three months ended September 30, 2011

Stryker

SpineView

Other

Total

Beginning balance at July 1

$

2,840

$

1,179

$

13

$

4,032

Additional advances received

-

-

35

35

Revenue recognized

(864

)

(348

)

(1

)

(1,213

)

Adjustments

(6

)

(1

)

-

(7

)

Ending balance at September 30

$

1,970

$

830

$

47

$

2,847

Six months ended September 30, 2012

Stryker

SpineView

Other

Total

Beginning balance at April 1

$

117

$

420

$

135

$

672

Additional advances received

-

-

8

8

Revenue recognized

(117

)

(420

)

-

(537

)

Adjustments (1)

-

-

(143

)

(143

)

Ending balance at September 30

$

-

$

-

$

-

$

-

Six months ended September 30, 2011

Stryker

SpineView

Other

Total

Beginning balance at April 1

$

4,433

$

1,255

$

5

$

5,693

Additional advances received

-

-

44

44

Revenue recognized

(2,453

)

(426

)

(2

)

(2,881

)

Adjustments

(10

)

1

-

(9

)

Ending balance at September 30

$

1,970

$

830

$

47

$

2,847

(1)

Amount reclassified to deferred revenue

Note 5. Long-Term Debt – Related Party

On September 19, 2012 (the “Effective Date”), we entered into a new $20.0 million revolving convertible promissory note (the “Replacement Note”) with our chairman (the “Lender”). The Replacement Note consolidated and restructured the $15.0 million in aggregate borrowings collectively outstanding under the Original Agreement (as defined below) and the Supplemental Note (as defined below) and provided for an additional $5.0 million available to us. As we draw upon the remaining $5.0 million, a beneficial conversion feature will be recorded if the market price of our common stock increases after the Effective Date. We also terminated the letter agreement dated August 14, 2012, pursuant to which the Lender had agreed to provide financial assistance to us in the amount of up to $3.0 million.

The Replacement Note accrues annual interest, payable annually, at the rate of 0.84%. The Replacement Note must be repaid in full on or before its fifth anniversary (the “Maturity Date”), but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the Replacement Note upon an event of default, as defined in the Replacement Note.

The outstanding principal amount of the Replacement Note is convertible at any time prior to the Maturity Date, at the Lender’s option, into shares of our common stock at a price of $1.20 per share, the closing price of our common stock on the Effective Date.

The Replacement Note replaces the original loan agreement between us and the Lender dated September 30, 2011 (the “Original Agreement”) pursuant to which we borrowed $10.0 million, and the promissory note of $5.0 million dated July 25, 2012 (the “Supplemental Note”) pursuant to which we borrowed $5.0 million. The amounts borrowed against the Original Agreement and Supplemental Note accrued interest at an annual rate of 7.5%. The Lender also had received an availability fee equal to an annual rate of 0.5% on the difference between the average annual principal amount of the outstanding balance under the Original Agreement and the maximum amount of $10.0 million.

10

In connection with the Original Agreement, the Lender received warrants to purchase an aggregate of 1,880,620 shares of our common stock at a weighted average exercise price of $1.86 per share. All of the warrants are vested and outstanding as of September 30, 2012 and expire on September 30, 2016.

We estimated the fair value of all of the stock warrants issued on the date of vesting using a Black-Scholes valuation model that used the weighted average assumptions for the risk-free interest rate, expected life (in years), and expected volatility. We recorded the transaction as a deferred debt cost and amortize to expense over the term of the loan. The following table summarizes amounts drawn against the Original Agreement and warrant issuances:

Month

Amount of

Advance

Number of

Warrant Shares

Vested

Fair Value of

Warrant Shares

on Date Vested

Exercise

Price

Risk-Free

Interest

Rate

Expected

Life

(In Years)

Expected

Volatility

March 2012

$

2,000

--

$

-

--

--

--

--

December 2011

2,000

--

-

--

--

--

--

September 2011

1,000

1,229,105

1,611

(1)

$

2.034

0.96

%

5.00

86

%

December 2010

500

37,879

30

$

1.650

1.56

%

3.90

91

%

June 2010

2,000

151,515

87

$

1.650

1.58

%

4.37

93

%

March 2010

2,500

189,394

106

$

1.650

2.36

%

4.62

91

%

November 2009

-

272,727

221

$

1.375

2.31

%

5.00

89

%

Total

$

10,000

1,880,620

$

2,055

(1)

Includes the incremental fair value of $73 thousand arising from the extension of the maturity date of the original (previously issued) warrants.

In connection with the termination of the Original Agreement, we determined that the transaction should be classified as an extinguishment of debt. Accordingly, we wrote-off the remaining deferred debt cost balance of $1.2 million at September 19, 2012.

Debt cost expense and interest expense related to the stock warrants and availability fee and accrued interest on outstanding borrowings, respectively, for the three and six months ended September 30, 2012 and 2011 was recorded in our condensed consolidated statement of operations as follows:

Three Months Ended

September 30,

Six Months Ended

September 30,

2012

2011

2012

2011

Debt cost expense (1)

$

128

$

43

$

272

$

84

Interest expense

233

96

422

191

(1)

Expense through September 19, 2012.

At September 30, 2012, we had $15.0 million in outstanding borrowings under the Replacement Note, which is reflected as convertible debt – related party on our condensed consolidated balance sheet. We had $4 thousand in accrued interest related to the Replacement Note, which is included in accrued expenses on our condensed consolidated balance sheet at September 30, 2012.

Note 6. Common Stock

On April 27, 2012, we entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we have the right to sell to LPC up to $15.0 million in shares of our common stock from time-to-time over a period of up to three years, subject to certain limitations and conditions set forth in the Purchase Agreement. This total maximum amount of $15.0 million would increase to $21.0 million if the aggregate market value of shares of our common stock held by non-affiliates reached at least $75.0 million during the three-year term of the Purchase Agreement. The Purchase Agreement contains customary representations, warranties and agreements between us and LPC, limitations (market price of our common stock and LPC’s ownership limit) and conditions to completing future sale transactions, indemnification rights and other obligations of the parties. In connection with the initial purchase under the Purchase Agreement, and any future sales under the Purchase Agreement, the Lender waived the repayment requirement under the Loan Agreement. On July 26, 2012, we amended the Purchase Agreement with LPC to, among other things, create a threshold price of $3.00 for the sale of our common stock to LPC, as calculated pursuant to the formula provided in the Purchase Agreement.

As consideration for entering into the Purchase Agreement and for their initial purchase of $1.0 million of our common stock in April 2012, we issued to LPC 175,333 shares of our common stock. As consideration for remaining future purchases under the Purchase Agreement, we also will issue to LPC, on a pro rata basis in connection with each purchase of shares by LPC, up to a total of approximately 215,000 additional shares of our common stock. We did not receive any cash proceeds from the issuance of 175,333 shares and will not receive any proceeds upon the issuance of any of the remaining 215,000 shares.

11

The following table summarizes the common stock issued and cash received in connection with the Purchase Agreement:

Month

Description

Number of

Shares of

Common Stock

Issued

Share

Price

Gross

Proceeds

April 2012

Initial purchase shares

599,880

$

1.667

$

1,000

April 2012

Initial commitment shares

160,000

-

-

April 2012

Initial additional commitment shares (1)

15,333

-

-

775,213

$

1,000

(1)

Calculated as follows: ($1.0 million stock purchase divided by $15.0 million total maximum amount) multiplied by 230,000 additional commitment shares.

In connection with the Purchase Agreement, we incurred $122 thousand of costs associated with investment banking fees, legal fees, and expense reimbursement to LPC. Our net proceeds from the sale of the initial purchase shares were $878 thousand.

Note 7. Stock-Based Awards

We maintain the following stockholder-approved equity incentive plans:

·

The 2000 Stock Incentive Plan (the “2000 Plan”) authorized the issuance of up to 4,500,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and performance shares.

·

The 2007 Stock Incentive Plan (the “2007 Plan”) authorized the issuance of up to 5,000,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and other stock-based awards. On July 26, 2012, our stockholders approved an amendment to the 2007 Plan further increasing the number of authorized shares issuable under the plan to 7,000,000 shares of common stock.

·

The 2003 Director Option Plan (the “2003 Plan”) authorized the issuance of up to 450,000 shares of common stock covering the annual automatic grant of 10,000 stock options per outside director per year. The 2003 Plan also provides for granting newly elected or appointed outside directors a one-time grant of 10,000 stock options.

The stock option plans provide that options may be granted at an exercise price of 100% of fair market value of our common stock on the date of grant, may be exercised in full or in installments, at the discretion of our Board or its Compensation Committee, and must be exercised within ten years from date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period based on fair values, generally four years. We use historical data to estimate expected employee behaviors related to option exercises and forfeitures and included these expected forfeitures as a part of the estimate of stock-based compensation expense as of the grant date.

Stock Options

The following table summarizes stock options activity for the six months ended September 30, 2012:

Number

of Shares

Exercise

Price Range

Weighted

Average

Exercise Price

Weighted

Average

Remaining

Contractual Life

Outstanding at March 31, 2012

6,007,661

$0.79

–

$4.88

$2.23

6.9

Granted

862,750

$1.24

–

$1.69

1.28

Exercised

(74,337

)

$0.97

–

$1.35

1.14

Canceled

(504,895

)

$0.79

–

$3.73

2.42

Outstanding at September 30, 2012

6,291,179

$0.85

–

$4.88

$2.10

6.5

Vested and expected to vest at September 30, 2012

6,107,563

$0.85

–

$4.88

$2.11

6.4

Exercisable at September 30, 2012

3,935,994

$0.85

–

$4.88

$2.32

4.8

The weighted average fair value of options granted during the three months ended September 30, 2012 and 2011 was $0.91 and $1.60 per share, respectively. The weighted average fair value of options granted during the six months ended September 30, 2012 and 2011 was $0.93 and $1.70 per share, respectively.

The total intrinsic value (the excess of the market price over the exercise price) was approximately $341 thousand for stock options outstanding, $241 thousand for stock options exercisable, and $328 thousand for stock options vested and expected to vest as of September 30, 2012. The total intrinsic value for stock options exercised during the three months ended September 30, 2012 and 2011 was approximately $21 thousand and $77 thousand, respectively. The total intrinsic value for stock options exercised during the six months ended September 30, 2012 and 2011 was approximately $23 thousand and $281 thousand, respectively.

12

We do not expect to realize any tax benefits from future disqualifying dispositions, if any, because we currently have a full valuation allowance against our deferred tax assets.

Restricted Stock

The following table summarizes restricted stock activity for the six months ended September 30, 2012:

Number

of Shares

Weighted

Average

Grant Price

Nonvested at March 31, 2012

306,606

$2.50

Granted

40,000

1.40

Vested

(124,723

)

2.46

Forfeited

(44,733

)

2.65

Nonvested at September 30, 2012

177,150

$2.25

At March 31, 2012, the balance of 306,606 shares of nonvested restricted stock included 286,606 shares of restricted stock granted to management as part of our fiscal 2012 performance incentive plan (the “2012 PIP”). The 2012 PIP included two separate performance measures: (1) Company revenue and operating loss performance (the “Company Component”), which accounted for 75% of the target incentive opportunity, and (2) individual executive performance milestones (the “Individual Component”), which accounted for the remaining 25%.

For the Company Component of the 2012 PIP, management achieved 80% of our target revenue and specified operating loss level for fiscal 2012, and participants received 80% of their Company Component (equal to a total of 144,808 shares of restricted stock). For the Individual Component, management determined the level of payout for each participant based on the achievement of the individual’s executive performance milestones (with awards totaling 108,959 shares of restricted stock). For the 253,767 shares of restricted stock that were achieved, restrictions on such shares will lapse over a four-year period. The restrictions on the first one-fourth of the shares (equal to 48,656 shares) lapsed in April 2012. The balance of the restricted stock for the 2012 PIP (equal to 44,733 shares) was forfeited as a result of missed milestones and employee terminations.

Stock-Based Compensation Expense

We account for stock-based awards issued to employees in accordance with the provisions of ASC 718 (Topic 718, Compensation – Stock Compensation). We recognize stock-based compensation expense on a straight-line uniform basis over the service period of the award, which is generally four years for employees. Stock-based awards issued to consultants are accounted for in accordance with the provisions of ASC 718 and ASC 505-50 (Subtopic 50 “Equity-Based Payments to Non-Employees” of Topic 505, Equity). Options granted to consultants are periodically revalued as the options vest, and are recognized as an expense over the related period of service or the vesting period, whichever is longer. Under the provisions of ASC 718, members of the Board are considered employees for calculation of stock-based compensation expense.

We estimated the fair value of the stock options granted on the date of grant using a Black-Scholes valuation model that used the weighted average assumptions noted in the following table. The risk-free interest rate assumption we use is based upon United States Treasury interest rates appropriate for the expected life of the awards. The expected life (estimated period of time that we expect employees, consultants and directors to hold their stock options) was estimated based on historical rates for two group classifications, (i) employees and consultants and (ii) outside directors. Expected volatility was based on historical volatility of our stock price for a period equal to the stock option’s expected life and calculated on a daily basis. The expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.

Three Months Ended

September 30,

Six Months Ended

September 30,

2012

2011

2012

2011

Risk-free interest rate

1.02%

1.17%

1.03%

1.44%

Expected life (in years)

6.4

5.5

6.4

6.0

Expected volatility

85%

88%

84%

87%

Expected dividend yield

--

--

--

--

We determine stock-based compensation expense for performance based restricted stock based upon the fair value of our common stock at the date of grant and recognize expense based upon the most probable outcome as to whether the performance targets will be achieved and the stock-based compensation being earned.

13

Stock-based compensation expense for the three and six months ended September 30, 2012 and 2011 was recorded in our condensed consolidated statement of operations as follows:

Three Months Ended

September 30,

Six Months Ended

September 30,

2012

2011

2012

2011

Cost of sales

$

22

$

41

$

69

$

81

Selling, general, and administrative expenses

538

857

907

1,277

Research and development expenses

9

13

36

29

Total stock-based compensation expense

$

569

$

911

$

1,012

$

1,387

At September 30, 2012, unrecognized stock-based compensation expense related to stock options was approximately $2.5 million and is expected to be recognized over a weighted average period of approximately 3.0 years. At September 30, 2012, unrecognized stock-based compensation expense related to nonvested (restricted stock) awards was approximately $0.3 million, which is expected to be recognized over a weighted average period of approximately 1.9 years.

Note 8. Treasury Stock

The following table summarizes treasury stock activity for the three and six months ended September 30, 2012 and 2011:

Three Months Ended

Number

of Shares

Repurchased

Cost

Weighted

Average

Purchase Price

September 30, 2012

17,417

$

24

$1.36

September 30, 2011

1,634

$

3

$1.92

Six Months Ended

September 30, 2012

17,417

$

24

$1.36

September 30, 2011

3,268

$

7

$2.22

The shares were purchased from management employees to cover income tax withholdings upon the lapse of restrictions on their restricted stock awards. Although not required to under our equity incentive plans, we anticipate repurchasing shares in a similar arrangement in fiscal 2013.

Note 9. Segment Information

We have two reportable segments, medical and industrial. Each of these operating segments has unique characteristics.

Our medical segment designs, develops, manufactures, and markets our advanced line of endoscopy-based products, including our state-of-the-art flexible endoscopes, and our EndoSheath technology (referred to as a sheath or EndoSheath disposable) for a variety of specialties and markets.

Our industrial segment, through our wholly-owned subsidiary Machida, designs, manufactures, and sells borescopes to a variety of users, primarily in the aircraft engine manufacturing and aircraft engine maintenance industries. A borescope is an instrument that uses optical fibers for the visual inspection of narrow cavities. Our borescopes are used to inspect aircraft engines, casting parts and ground turbines, among other items.

Management evaluates the revenue and profitability performance of each of our product lines to make operating and strategic decisions. We have no intersegment revenue.

14

The following table presents key financial highlights, by reportable segments:

Three Months Ended

Medical

Industrial

Adjustments *

Consolidated

September 30, 2012

Net sales

$

2,724

$

1,015

$

-

$

3,739

Gross profit

746

324

-

1,070

Operating (loss) income

(2,688

)

67

-

(2,621

)

Interest expense, net

(236

)

-

-

(236

)

Depreciation and amortization

196

6

-

202

Stock-based compensation expense

560

9

-

569

Total assets

12,751

1,753

(1,974

)

12,530

Expenditures for fixed assets

19

-

-

19

September 30, 2011

Net sales

$

3,384

$

641

$

-

$

4,025

Gross profit

1,143

254

-

1,397

Operating loss

(2,739

)

(66

)

-

(2,805

)

Interest expense, net

(97

)

-

-

(97

)

Depreciation and amortization

201

12

-

213

Stock-based compensation expense

892

19

-

911

Total assets

15,901

1,329

(1,863

)

15,367

Expenditures for fixed assets

30

-

-

30

Six Months Ended

September 30, 2012

Net sales

$

5,220

$

1,915

$

-

$

7,135

Gross profit

1,341

642

-

1,983

Operating (loss) income

(5,032

)

107

-

(4,925

)

Interest expense, net

(429

)

-

-

(429

)

Depreciation and amortization

393

13

-

406

Stock-based compensation expense

960

52

-

1,012

Expenditures for fixed assets

55

-

-

55

September 30, 2011

Net sales

$

6,489

$

1,292

$

-

$

7,781

Gross profit

2,043

482

-

2,525

Operating loss

(5,100

)

(195

)

-

(5,295

)

Interest expense, net

(191

)

-

-

(191

)

Depreciation and amortization

379

23

-

402

Stock-based compensation expense

1,327

60

-

1,387

Expenditures for fixed assets

106

-

-

106

September 30,

* Adjustments

2012

2011

Intercompany eliminations

$

(1,288

)

$

(1,177

)

Investment in subsidiaries

(686

)

(686

)

Total adjustments

$

(1,974

)

$

(1,863

)

15

The following table presents the reconciliation to loss before provision for income taxes for the three and six months ended September 30, 2012 and 2011:

Three Months Ended

September 30,

Six Months Ended

September 30,

Reconciliation to loss before provision for income taxes:

2012

2011

2012

2011

Operating loss

$ (2,621)

$ (2,805)

$ (4,925)

$ (5,295)

Interest expense, net

(236)

(97)

(429)

(191)

Debt cost expense

(128)

(43)

(272)

(84)

Loss on extinguishment of debt

(1,244)

-

(1,244)

-

Other, net

(35)

(10)

(40)

(11)

Loss before provision for income taxes

$ (4,264)

$ (2,955)

$ (6,910)

$ (5,581)

16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Vision-Sciences, Inc. and its subsidiaries (the “Company,” or “our”, “us”, or “we”) designs, develops, manufactures, and markets products for endoscopy – the science of using an instrument, known as an endoscope, to provide minimally invasive access to areas not readily visible to the human eye. We operate in two segments: medical and industrial. Our medical segment designs, manufactures, and sells our advanced line of endoscopy-based products, including our state-of-the-art flexible fiber and video endoscopes and our EndoSheath technology, for a variety of specialties and markets. Our industrial segment, through our wholly-owned subsidiary, Machida, Inc. (“Machida”), designs, manufactures, and sells borescopes to a variety of users, primarily in the aircraft engine-manufacturing and aircraft engine-maintenance industries. A borescope is an instrument that uses optical fibers for the visual inspection of narrow cavities.

Medical Business Segment

Our medical segment designs, manufactures, and sells our advanced line of endoscopy-based products, including our flexible fiber and video endoscopes and our EndoSheath technology, for a variety of specialties and markets. Our flexible endoscopes are unlike conventional endoscopes, and when utilized with our EndoSheath technology, offer a multitude of benefits and advantages to the healthcare practitioner and patient.

We target six market spaces for our endoscopes and our EndoSheath technology:

·

Urology – we supply our cystoscopes, ureteroscopes, and EndoSheath technology to the Endoscopy Division of Stryker Corporation (“Stryker”) in North and Latin America, South America, China and Japan. Although Stryker was to receive the exclusive rights for the rest of the world in April 2012, we reached an agreement with Stryker to delay this launch until at least December 2012. Until that time, we manufacture and sell our cystoscopes and EndoSheath technology to our independent distributors for the rest of the world.

Gastroenterology – we manufacture, market, and sell our TNE endoscopes and EndoSheath technology to gastroenterology (“GI”) physicians, ear, nose, and throat (“ENT”) physicians and others with a GI focus as part of their practice.

The following table summarizes the products we sell in each market space and the distribution network we use to market and sell those products:

Market

Products

Distribution Network

Urology

URT-7000 Video Ureteroscope

Stryker*

CST-5000 Video Cystoscope

Stryker*; international distributors

CST-4000 Fiber Cystoscope

Stryker*; international distributors

DPU-5050 Digital Processing Unit

International distributors

EndoSheath technology (cystoscopy only)

Stryker*; international distributors

Peripherals and accessories

Stryker*; international distributors

ENT

ENT-5000 Video Endoscope

U.S. sales force; international distributors

ENT-4500 Fiber Endoscope

U.S. sales force; international distributors

ENT-4000 Fiber Endoscope

U.S. sales force; international distributors

DPU-5050 Digital Processing Unit

U.S. sales force; international distributors

Peripherals and accessories

U.S. sales force; international distributors

Surgery / GI

TNE-5000 Video Endoscope

U.S. sales force; international distributors

DPU-5050 Digital Processing Unit

U.S. sales force; international distributors

EndoSheath technology

U.S. sales force; international distributors

Peripherals and accessories

U.S. sales force; international distributors

Pulmonology (Critical Care)

BRS-5000 Video Bronchoscope

U.S. sales force; international distributors

BRS-4000 Fiber Bronchoscope

U.S. sales force; international distributors

DPU-5050 Digital Processing Unit

U.S. sales force; international distributors

EndoSheath technology

U.S. sales force; international distributors

Peripherals and accessories

U.S. sales force; international distributors

Spine

SPV-7000 Video Endoscope

SpineView

DPU-5050 Digital Processing Unit

SpineView

Peripherals and accessories

SpineView

* North America, South America, Latin America, China, and Japan

Our proprietary reusable flexible endoscope is combined with a single-use, sterile protective EndoSheath disposable, which is placed over the patient contact area of the scope. Our “always sterile” EndoSheath technology reduces the risks of cross-contamination associated with the reuse (or “reprocessing”) of conventional endoscopes, which are difficult, costly, and time consuming to clean and disinfect or sterilize. In November 2011, the ECRI Institute listed cross-contamination from flexible endoscopes as the fourth most dangerous hazard on its list of the top-ten health technology hazards for 2012. The use of our EndoSheath technology allows healthcare providers to perform a rapid, simplified reprocessing routine after use, avoiding the elaborate high level disinfection/sterilization routines required by the U.S. Food and Drug Administration (the “FDA”) for conventional endoscopes. The FDA requires that all conventional flexible endoscopes be reprocessed according to FDA-cleared manufacturers’ regulations and organizational guidelines, whether they are used in hospitals, clinics or office settings. With our EndoSheath technology we are able to reduce the steps to reprocess flexible endoscopes from approximately 27 to three, thereby lowering costs and saving time. This design of “always ready” equipment, which allows for a rapid and less damaging cleaning process, provides a multitude of benefits to healthcare practitioners, such as lower capital equipment investment, less service and maintenance costs of capital equipment, less staff exposure to toxic chemicals, increased patient scheduling flexibility and throughput, improved staff productivity and a more practical implementation of endoscopy.

18

We believe our technology delivers significant value to our customers – doctors, clinics and hospitals – through reduced capital, staff and service costs, and increased patient throughput, practice revenue, and profitability. Our goal is to become a customer-centric organization with a focus on enhancing shareholder value. We are doing this by:

During the first quarter of fiscal 2013, we began to exclusively supply to Stryker our first charge-coupled device (CCD) based flexible ureteroscope under our existing agreement. This ureteroscope expands our new 7000 Series video endoscopy platform and is the smallest CCD-based video endoscope in the marketplace today. Ureteroscopes are used for diagnostic and therapeutic procedures in the ureter and the kidney, typically done in a hospital operating room setting.

Industrial Business Segment

Our industrial segment, through our wholly-owned subsidiary Machida, designs, manufactures, and sells borescopes to a variety of users, primarily in the aircraft engine manufacturing and aircraft engine maintenance industries. A borescope is an instrument that uses optical fibers for the visual inspection of narrow cavities. Our borescopes are used to inspect aircraft engines, casting parts and ground turbines, among other items. Machida’s quality line of borescopes includes a number of advanced standard features normally found only in custom designed instruments.

Long-Term Debt – Related Party

On September 19, 2012 (the “Effective Date”), we entered into a new $20.0 million revolving promissory note (the “Replacement Note”) with our chairman (the “Lender”). The Replacement Note consolidates and restructures the $15.0 million in aggregate borrowings collectively outstanding under the Original Agreement (as defined below) and the Supplemental Note (as defined below) and provides for an additional $5.0 million available to us, for an aggregate of up to $20.0 million. We also terminated the letter agreement dated August 14, 2012, pursuant to which the Lender had agreed to provide financial assistance to us in the amount of up to $3.0 million.

The Replacement Note accrues annual interest, payable annually, and is set at the “applicable federal rate” in effect on the date of the Replacement Note (as defined in the Replacement Note; equal to 0.84%). The Replacement Note must be repaid in full on or before its fifth anniversary (the “Maturity Date”), but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the Replacement Note upon an event of default, as defined in the Replacement Note.

The outstanding principal amount of the Replacement Note is convertible at any time prior to the Maturity Date, at the Lender’s option, into shares of our common stock at a price of $1.20 per share, the closing price of our common stock on the Effective Date.

The Replacement Note replaces the original loan agreement between us and the Lender dated September 30, 2011 (the “Original Agreement”) pursuant to which we borrowed $10.0 million, and the promissory note of $5.0 million dated July 25, 2012 (the “Supplemental Note”) pursuant to which we borrowed $5.0 million. The amounts borrowed against the Original Agreement and Supplemental Note accrued interest at an annual rate of 7.5%. The Lender also had received an availability fee equal to an annual rate of 0.5% on the difference between the average annual principal amount of the outstanding balance under the Original Agreement and the maximum amount of $10.0 million.

At September 30, 2012, we had $15.0 million in outstanding borrowings and $5.0 million available under the Replacement Note.The outstanding balance is reflected as convertible debt – related party on our condensed consolidated balance sheet.

Equity Purchase Agreement

On April 27, 2012, we entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which we have the right to sell to LPC up to $15 million in shares of our common stock from time-to-time over a period of up to three years, subject to certain limitations and conditions set forth in the Purchase Agreement. This total maximum amount of $15 million would increase to $21 million if the aggregate market value of shares of our common stock held by non-affiliates reached at least $75 million during the 36-month term of the Purchase Agreement. The Purchase Agreement contains customary representations, warranties and agreements between us and LPC, limitations (market price of our common stock and LPC’s ownership limit) and conditions to completing future sale transactions, indemnification rights and other obligations of the parties. In connection with the initial purchase under the Purchase Agreement, and any future sales under the Purchase Agreement, the Lender waived the repayment requirement under the Loan Agreement. On July 26, 2012, we amended the Purchase Agreement with LPC to, among other things, create a threshold price of $3.00 for the sale of our common stock to LPC, as calculated pursuant to the formula provided in the Purchase Agreement.

19

As consideration for entering into the Purchase Agreement and for their initial purchase of $1.0 million of our common stock, we issued to LPC 175,333 shares of our common stock. As consideration for remaining future purchases under the Purchase Agreement, we also will also issue to LPC, on a pro rata basis in connection with each purchase of shares by LPC, up to a total of 215,000 additional shares of our common stock. We did not receive any cash proceeds from the issuance of 175,333 shares and will not receive any proceeds upon the issuance of any of the remaining 215,000 shares.

Registered Trademarks, Trademarks and Service Marks

Vision-Sciences, Inc. owns the registered trademarks Vision Sciences®, Slide-On®, EndoSheath®, EndoWipe® and The Vision System®. Not all products referenced in this quarterly report on Form 10-Q are approved or cleared for sale, distribution, or use.

Results of Operations (in thousands, except percentages)

Net Sales

In the medical segment, we track sales of our endoscopes and EndoSheath technology by market. We also track sales of peripherals and accessories which can be sold to more than one market. Net sales by operating segment and by market/category for the three and six months ended September 30, 2012 and 2011 were as follows:

Three Months Ended

September 30,

Six Months Ended

September 30,

Market/Category

2012

2011

Change

2012

2011

Change

Urology

$

888

$

1,503

-41

%

$

1,944

$

3,412

-43

%

ENT

587

572

3

%

1,019

930

10

%

Surgery / GI

334

306

9

%

510

425

20

%

Pulmonology (Critical Care)

162

203

-20

%

287

310

-7

%

Spine

181

348

-48

%

440

426

3

%

Repairs, peripherals, and accessories

572

452

27

%

1,020

986

3

%

Total medical sales

2,724

3,384

-20

%

5,220

6,489

-20

%

Borescopes

842

451

87

%

1,473

959

54

%

Repairs

173

190

-9

%

442

333

33

%

Total industrial sales

1,015

641

58

%

1,915

1,292

48

%

Net sales

$

3,739

$

4,025

-7

%

$

7,135

$

7,781

-8

%

Net sales decreased $0.3 million, or 7%, in the second quarter of fiscal 2013 to $3.7 million compared to $4.0 million in the second quarter of fiscal 2012. During the second quarter of fiscal 2013, our medical segment’s net sales of $2.7 million decreased by $0.7 million, or 20%, primarily attributable to lower sales of our endoscopes in the urology market. Our industrial segment’s net sales of $1.0 million increased by $0.4 million, or 58%, primarily attributable to higher demand of our engine turning tools, which are being used with our 2mm video-based borescopes. Although we achieved year-over-year growth in our industrial segment, we expect the level of future sales to remain relatively flat as this operating segment’s products are mature.

Net sales decreased $0.6 million, or 8%, in the first half of fiscal 2013 to $7.1 million compared to $7.8 million in the first half of fiscal 2012. During the first half of fiscal 2013, our medical segment’s net sales of $5.2 million decreased by $1.3 million, or 20%, primarily attributable to lower sales of our endoscopes in the urology market. Our industrial segment’s net sales of $1.9 million increased by $0.6 million, or 48%, primarily attributable to higher demand of our 2mm video-based borescopes and engine turning tools.

20

The following table summarizes net sales by market/category and by product for our medical operating segment for the three and six months ended September 30, 2012 and 2011:

Three Months Ended

September 30,

Six Months Ended

September 30,

Market/Category

2012

2011

Change

2012

2011

Change

Urology

Endoscopes

361

860

-58

%

936

2,022

-54

%

EndoSheath technology

527

643

-18

%

1,008

1,390

-27

%

Total urology market

888

1,503

-41

%

1,944

3,412

-43

%

ENT

Endoscopes

587

572

3

%

1,019

930

10

%

Surgery / GI

Endoscopes

$

288

$

278

4

%

$

433

$

382

13

%

EndoSheath technology

46

28

64

%

77

43

79

%

Total surgery / GI market

334

306

9

%

510

425

20

%

Pulmonology (Critical Care)

Endoscopes

126

178

-29

%

206

259

-20

%

EndoSheath technology

36

25

44

%

81

51

59

%

Total pulmonology market

162

203

-20

%

287

310

-7

%

Spine

Endoscopes

181

348

-48

%

440

426

3

%

Repairs, peripherals, and accessories

572

452

27

%

1,020

986

3

%

Total medical sales

$

2,724

$

3,384

-20

%

$

5,220

$

6,489

-20

%

Product

Endoscopes

$

1,543

$

2,236

-31

%

$

3,034

$

4,019

-25

%

EndoSheath technology

609

696

-13

%

1,166

1,484

-21

%

Repairs, peripherals, and accessories

572

452

27

%

1,020

986

3

%

Total medical sales

$

2,724

$

3,384

-20

%

$

5,220

$

6,489

-20

%

Net sales to the urology market during the second quarter and first half of fiscal 2013 decreased by $0.6 million (41%) and $1.5 million (43%), respectively, compared to the same periods in fiscal 2012. The year-over-year decline was primarily attributable to the lower sales of our flexible video and fiber cystoscopes and related EndoSheath technology products to Stryker due in large part to initial stocking by Stryker in the first half of fiscal 2012 to support the April 2011 commencement of their marketing and sales efforts. Net sales to Stryker were down $0.5 million (54%) and $1.4 million (59%) in the second quarter and first half of fiscal 2013, respectively.

Net sales to the ENT market during the second quarter and first half of fiscal 2013 increased by $15 thousand (3%) and $89 thousand (10%), respectively, compared to the same periods in fiscal 2012. Higher demand of our ENT fiberscopes in the international markets, primarily in Israel where our unit volume increased threefold, was the driver behind the year-over-year growth.

Net sales to the surgery and GI markets during the second quarter and first half of fiscal 2013 increased by $28 thousand (9%) and $85 thousand (20%), respectively, compared to the same periods in fiscal 2012. Higher average selling prices of our surgical endoscopic platform (TNE-5000 videoscope and digital processing unit) and an increase in demand for our EndoSheath technology contributed to the year-over-year growth. Our EndoSheath technology unit volume increased 70% during the first half of fiscal 2013 compared to the same period in fiscal 2012.

Net sales to the pulmonology (critical care) market during the second quarter and first half of fiscal 2013 decreased by $41 thousand (20%) and $23 thousand (7%), respectively, compared to the same periods in fiscal 2012. The decreases were primarily attributable to lower sales of our fiber bronchoscopes in the international markets. We are encouraged, however, by the increase in usage of our EndoSheath technology as evidenced by the year-over-year sales growth and higher volume of sheaths sold during the first half of fiscal 2013. We continue to focus our efforts on increasing our installed base to drive further adoption of our EndoSheath technology.

Net sales to SpineView during the second quarter and first half of fiscal 2013 decreased by $167 thousand (48%) and increased by $14 thousand (3%), respectively, compared to the same periods in fiscal 2012. Earlier in the second quarter of fiscal 2013, SpineView filed a traditional 510(k) with the Food and Drug Administration (“FDA”) for clearance to use our 2mm video-based endoscope for spine applications. We continue to supply endoscopes for clinical use to support SpineView in its effort to build awareness for the product in the minimally invasive spine surgery market until FDA approval is received.

21

Net sales of repairs, peripherals, and accessories during the second quarter and first half of fiscal 2013 increased by $120 thousand (27%) and $34 thousand (3%), respectively, compared to the same periods in fiscal 2012. The year-over-year growth was primarily attributable to an increase in our repairs business, which increased 22% and 27% during the second quarter and first half of fiscal 2013, respectively.

Gross Profit (Net Sales Less Cost of Sales)

Gross profit by operating segment for the three and six months ended September 30, 2012 and 2011 was as follows:

Three Months Ended

September 30,

Six Months Ended

September 30,

Gross Profit

2012

2011

Change

2012

2011

Change

Medical

$

746

$

1,143

-35

%

$

1,341

$

2,043

-34

%

As percentage of net sales

27

%

34

%

-7

%

26

%

31

%

-5

%

Industrial

324

254

28

%

642

482

33

%

As percentage of net sales

32

%

40

%

-8

%

34

%

37

%

-3

%

Gross profit

$

1,070

$

1,397

-23

%

$

1,983

$

2,525

-21

%

Gross margin percentage

29

%

35

%

-6

%

28

%

32

%

-4

%

The gross margin percentage was 29% in the second quarter of fiscal 2013 compared to 35% in the second quarter of fiscal 2012. The year-over-year decline was primarily attributable to a reduction in the allocation of manufacturing expenses to support research and development activities (4% gross margin percentage points). The gross margin percentage was 28% in the first half of fiscal 2013 compared to 32% in the first half of fiscal 2012. The decrease was primarily attributable to a decline in our manufacturing build of endoscopes and EndoSheath technology and reduced leverage of our fixed manufacturing costs due to the lower net sales during the first half of fiscal 2013. Our production volume was down 35% and 39% for our endoscopes and EndoSheath technology, respectively, in the current fiscal year. Last year’s production benefited from the initial stocking orders from Stryker.

Operating Expenses

Operating expenses by operating segment for the three and six months ended September 30, 2012 and 2011 were as follows: